A large number of firms are in heavy competition to gain market share in the consumer credit market. Consumers of credit cards tend to show little loyalty to any one credit card. This is in part due to an influx of offers from competing credit cards having low initial “teaser” rates and the ease of switching from one card to the next. Credit card sponsors have attempted to inspire loyalty in the cardholders by tying use of the card to a reward system. Some credit card sponsors award points in proportion to the amount of dollar transactions conducted. These points can then be exchanged with the sponsoring airline for free airfare. Another marketing tactic is to tie the total expenditures per year to a cash-back reward that is a small fraction of the total expenditures. Despite the success of some of the incentive programs in obtaining and retaining customers, reward systems are typically costly to implement and can have a detrimental effect on profit margins.
Incentive programs can also be tied to transactions limited to a particular group of transactions where the sponsor is both the acquiring bank and the issuing bank in what is referred to as an “on-us” transaction. In a typical credit card transaction, a cardholder makes a purchase at a merchant and the merchant forwards the transaction to an acquiring bank. The acquiring bank processes the transaction for a fee and sends the transaction through a credit card association network (VISA, MASTERCARD, AMERICAN EXPRESS, etc.). The credit card association network further processes the transaction for a fee and sends the transaction to the card sponsoring bank. The card sponsoring bank then posts the transaction to the cardholder's credit account. In an “on-us” transaction, the acquiring bank and the sponsoring bank are the same entity, which allows the acquiring bank to clear the transaction without forwarding the transaction through the credit card association network and incurring a predetermined fee, or other additional fees. The absence of the credit card association network fee allows the sponsoring bank to more easily support incentives for “on-us” purchases and thereby inspire customer loyalty. Despite the ability to offer incentives for “on-us” transactions, the situations in which an “on-us” transaction can occur are fairly limited. Typically, the merchant must be in a customized agreement with the card sponsor, or must be the card sponsor itself, limiting the number of merchants participating in “on-us” credit transactions.
Merchant exchanges specialize in transactions between merchants where bulk purchases of goods and/or services are made for later resale in retail transactions. Because of the high overall value and low profit margins associated with each transaction, use of credit cards is limited by their relatively high fees. On the other hand, credit must typically be extended by one of the parties to the other to complete the transaction. Evaluating the credit-worthiness of the opposing party is difficult and costly, and tends to limit the access of many small businesses to merchant exchanges.
It would be advantageous to have a credit card that provides sufficient incentives to attract new cardholders and inspire loyalty in current cardholders. It would also be advantageous to have a credit card that facilitates varied transactions with several types of merchants. Another desired feature would be a credit card that can be used by small businesses to purchase from merchants on a merchant exchange without the merchant incurring large fees. Finally, it would be advantageous to have a credit card that increases the number of transactions through incentives while minimizing the detrimental effects on the card sponsor's profits.